Illustration » Problem

Following are the Balance Sheets of BROYHILL Industries Ltd, as on 31.12.2005 and 31.12.2006

Balance Sheet of M/s BROYHILL Industries Ltd,
Liabilities	As on 31st December		Assets	As on 31st December
Liabilities	2005	2006	Assets	2005	2006
Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Provision for Depreciation on Buildings on Plant & Machinery Provision for: Bad & Doubtful Debts Taxation	12,00,000 4,00,000 3,00,000 2,50,000 4,50,000 8,00,000 2,00,000 12,000 40,000 60,000 50,000	16,00,000 6,00,000 3,50,000 5,00,000 3,80,000 13,00,000 - 6,000 48,000 70,000 1,20,000	Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock Bank Preliminary expenses	6,00,000 8,00,000 2,00,000 6,00,000 2,20,000 3,50,000 3,38,000 6,00,000 40,000 14,000	5,50,000 14,90,000 2,00,000 10,00,000 - 4,70,000 3,72,000 8,00,000 80,000 12,000
	37,62,000	49,74,000		37,62,000	49,74,000

You are required to analyse the Funds Flow and the Changes in working Capital in as much detail as possible, using the following additional details available.

1.	A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000 ) was sold for Rs. 1,20,000.
2.	Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000.
3.	Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve.
4.	All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture.
5.	Dividends of Rs. 1,00,000 were paid during the year.
6.	Provision for taxation in 2006 Rs. 1,10,000.
7.	During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000.

Soution » Working Notes - Identify the Current and Non Current Accounts

Identify the Current and Non-Current accounts from within the balance sheet distinctly.

Balance Sheet of M/s BROYHILL Industries Ltd,
Liabilities	As on 31st December		Assets	As on 31st December
Liabilities	2005	2006	Assets	2005	2006
Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Provision for Depreciation on Buildings on Plant & Machinery Provision for: Bad & Doubtful Debts Taxation	12,00,000 4,00,000 3,00,000 2,50,000 4,50,000 8,00,000 2,00,000 12,000 40,000 60,000 50,000	16,00,000 6,00,000 3,50,000 5,00,000 3,80,000 13,00,000 - 6,000 48,000 70,000 1,20,000	Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock Bank Preliminary expenses	6,00,000 8,00,000 2,00,000 6,00,000 2,20,000 3,50,000 3,38,000 6,00,000 40,000 14,000	5,50,000 14,90,000 2,00,000 10,00,000 - 4,70,000 3,72,000 8,00,000 80,000 12,000
	37,62,000	49,74,000		37,62,000	49,74,000

We need not redraw the total balance sheet, but we should ensure that we are taking all the accounts into consideration.

Marking in the problem itself is an option. But in examination conditions, we may not be allowed to mark anything on the question paper. In such situations, a list of the account names would help.

Liabilities	Assets
Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Provision for Depreciation on Buildings on Plant & Machinery Provision for: Bad & Doubtful Debts Taxation	Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock Bank Preliminary expenses

Non-Current Accounts
Current Accounts

Solution » Schedule of Changes in Working Capital

The schedule/statement of changes in working capital is an abstract of the information relating to all the current natured accounts i.e. all accounts that are part of current assets and current liabilities in a specified format.

M/S BROYHILL Industries Ltd Schedule/Statement of Changes in Working Capital for the period from 31/12/05 to 31/12/06
Particulars/Account	Balance as on 31^st March		Working Capital Change
Particulars/Account	2005	2006	Increase	Decrease
a) CURRENT ASSETS 1) Debtors 2) Stock 3) Bank	3,38,000 6,00,000 40,000	3,72,000 8,00,000 80,000	34,000 2,00,000 40,000	- - -
TOTAL	9,78,000	12,52,000	2,74,000	-
b) CURRENT LIABILITIES 1) Creditors 2) Provision for Bad Debts 2) Provision for Taxation	4,50,000 60,000 50,000	3,80,000 70,000 1,20,000	70,000	10,000 70,000
TOTAL	5,60,000	5,70,000	70,000	80,000
Working Capital [(a) - (b)]	4,18,000	6,82,000
TOTAL			3,14,000	4,78,000
Net Change in Working Capital			2,64,000

There is an increase in working capital to the extent of 2,64,000.

The net change can also be obtained from the working capital figures relating to the two balance sheet dates.

Change in Working Capital	=	Working Capital as on 31/12/06 - Working Capital as on 31/12/05
	=	6,82,000 - 4,18,000
	=	+ 2,64,000

Positive value indicates an increase in working capital.

Assumption : Provision for Taxation is a current account.

Solution » Altered Non Current Accounts

Altered non current accounts are the non current accounts which have been affected by the accounting transactions during the period for which the funds flow is being analysed.

These are non Current Accounts which are

Present in both the Balance Sheets having different balances.
Share Capital a/c, Plant and Machinery a/c are examples
Present in only one of the balance sheets
Fixed Deposits a/c and Investments a/c
Present in both the Balance Sheets and whose balance does not differ.
Furniture a/c
A non current account balance might be the same in the two balance sheets, even if it had been affected by the transactions during the period for which the funds flow is being analysed, if the change on account of one or more transactions is offset by the change on account of one or more other transactions.
Not present in both the balance sheets.
Non current accounts which would have been created and closed during the period for which the funds flow is being analysed will not be present in the balance sheets. Interim Dividend account is an example.

Altered non current accounts not revealed by the balance sheet information should be assessed from the additional information provided along with the two balance sheets.

Preparing the altered Non Current Ledger Accounts

Non current Ledger account should be prepared so as to reveal all the information relating to that account for the period for which the funds flow is being analysed.

Draw all the altered ledger accounts filling them with the information in the balance sheets.
Balance Sheet information is used only once.
Additional information represents accounting transactions.
Identify the journal entries for the transactions and where they affect the non-current accounts, post them into the ledgers.
Close the account holding the appropriated profits (Profit and Loss a/c in this problem) to obtain the figure of funds from operations.
Preparing the account holding the accumulated profits towards the end would aid understanding.

If in doubt prepare all the non-current ledger accounts.

Soution » Working Notes - Journal Entries for additional information

A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000) was sold for Rs. 1,20,000.

Book value of Machine sold

	=	Cost - Accumulated Depreciation
	=	1,40,000 - 12,000
	=	1,28,000

Profit/Loss on sale

	=	Sale price - Book Value
	=	1,20,000 - 1,28,000
	=	- 8,000 [Loss]

Writing off Machinery	Dr. Machine Sale a/c Cr. Plant and Machinery a/c
Writing off Depreciation Reserve	Dr. Provision for Depreciation on Plant and Machinery a/c Cr. Machine Sale a/c
Recording Machine Sale	Dr. Bank a/c Cr. Machine Sale a/c
Recording Loss	Dr. Profit/Loss Appropriation a/c Cr. Machine Sale a/c

Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000.

Book value of Building sold

	=	Cost - Accumulated Depreciation
	=	1,00,000 - 10,000
	=	90,000

Profit/Loss on sale

	=	Sale price - Book Value
	=	1,10,000 - 90,000
	=	+ 20,000 [Profit]

Writing off Building	Dr. Building Sale a/c Cr. Building a/c
Writing off Depreciation Reserve	Dr. Provision for Depreciation on Building a/c Cr. Building Sale a/c
Recording Building Sale	Dr. Bank a/c Cr. Building Sale a/c
Recording Profit	Dr. Building Sale a/c Cr. Profit/Loss Appropriation a/c

Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve.

Recording Land Sale	Dr. Bank a/c Cr. Land a/c
Recording Profit	Dr. Land a/c Cr. Profit/Loss Appropriation a/c

This being a simple transaction we may avoid using the asset sale account.

All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture.

Sale proceeds of investments

	=	Book Value of investments + Profit
	=	2,20,000 + 24,000
	=	2,44,000

Value of Furniture Purchased

	=	Investment Sale proceeds - Fixed Deposits Cleared
	=	2,44,000 - 2,00,000
	=	44,000

Recording Investment Sale	Dr. Bank a/c Cr. Investments a/c
Recording Profit	Dr. Investment a/c Cr. Profit/Loss Appropriation a/c
Clearing Fixed Deposits	Dr. Fixed Deposits a/c Cr. Bank a/c
Purchasing Furniture	Dr. Furniture a/c Cr. Bank a/c

Dividends of Rs. 1,00,000 were paid during the year.

Since there is no Reserve/Provision for dividend account either at the beginning or the end, the payment of dividend is to be treated as an equivalent of interim dividend. The dividend is paid and appropriated from profits during the current accounting period itself.

Payment of Dividend	Dr. Dividend a/c Cr. Bank a/c
Appropriation of Dividend	Dr. Profit/Loss Appropriation a/c Cr. Dividend a/c

Provision for taxation in 2006 Rs. 1,10,000.

Since provision for taxation has been shown along with other current natured accounts it is treated as a current account.

Provision for taxation being a current natured account, the transaction of creation of provision would result in a charge to the profit and loss account.

Provision created	Dr. Profit and Loss a/c Cr. Provision for Taxation a/c
Payment of Tax	Dr. Provision for Taxation a/c Cr. Bank a/c

Since we know the opening and closing balances, the amount paid towards taxation would be revealed by the Provision for taxation account as the balancing figure.

Since both the provision for taxation account and the bank account are current natured, the transaction of payment of tax would not be a cross transaction.

During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000.

In financial accounting, this transaction of purchase of assets for consideration other than cash is assumed to involve three distinct transactions.

Purchase of Asset
Falling due to the vendor on account of the purchase
Clearing vendors due

Purchase of Assets	Dr. Building a/c Dr. Stock a/c Cr. Asset Purchase a/c
Falling due to the vendor	Dr. Asset Purchase a/c Cr. Vendor a/c
Clearing Vendor dues	Dr. Vendor a/c Cr. Equity Share Capital a/c

In analysing funds flow, we avoid considering the transactions in such detailed. However we consider the transactions of acquisition of the assets separately as transaction representing the acquisition of the current asset will form a cross transaction and the other transaction is a non-cross transaction.

Purchase of Building	Dr. Building a/c Cr. Equity Share Capital a/c
Purchase of Stock	Dr. Stock a/c Cr. Equity Share Capital a/c

In preparing the Funds flow statement, we neither record journal entries nor post ledger accounts. We only take the help of the formats in financial accounting to help us derive the information needed.

Solution » Working Notes : Altered Non Current Ledger Accounts

From Balance Sheets
From additional information
Appropriations/Losses
Funds Flow - Posting relevant to transaction resulting in flow of fund

Share Capital

Dr	Share Capital a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance c/d

16,00,000

By Balance b/d
By Buildings
By Stock
By Bank (?)

12,00,000
50,000
50,000
3,00,000

16,00,000

By Balance b/d

16,00,000

From additional information - 7.

Assumption :

1.	The balancing figure represents additional capital raised during the current period in consideration for cash or any other current assets.

Debentures

Dr	Debentures a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance c/d

6,00,000

By Balance b/d
By Bank (?)

4,00,000
2,00,000

6,00,000

By Balance b/d

6,00,000

Assumption :

1.	The balancing figure represents additional capital raised through debentures during the current period in consideration for cash or any other current assets.

Reserve

Dr	Reserve a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance c/d

3,50,000

By Balance b/d
By Land
By P/L Appr. a/c (?)

3,00,000
20,000
30,000

3,50,000

By Balance b/d

3,50,000

From additional information - 3.

Assumption :

1.	The balancing figure represents reserve created by appropriating profits during the current period.

Profit and Loss a/c

Dr	Profit and Loss a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance c/d

5,00,000

By Balance b/d
By P/L Appr. a/c (?)

2,50,000
2,50,000

5,00,000

By Balance b/d

5,00,000

Assumption :

1.	The balancing figure represents net profit of the current period.

Bank Loan

Dr	Bank Loan a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance c/d

13,00,000

By Balance b/d
By Bank a/c (?)

8,00,000
5,00,000

13,00,000

By Balance b/d

13,00,000

From additional information - 3.

Assumption :

1.	The balancing figure represents additional loan taken during the current period.

Fixed Deposits

Dr	Fixed Deposits a/c	Cr

Particulars

Amount

Particulars

Amount

To Bank a/c

2,00,000

By Balance b/d

2,00,000

Since there is no change in the balance and we find no transactions affecting this account in the additional information, we may avoid preparing this account.

If in doubt prepare all non-current accounts.

Goodwill

Dr	Goodwill a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d

6,00,000

By P/L Appr. a/c (?)
By Balance b/d

50,000
5,50,000

6,00,000

To Balance b/d

5,50,000

Assumption :

1.	The balancing figure represents goodwill written off as loss from the profits of the current period.

Plant and Machinery

Dr	Plant and Machinery a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d
To Bank a/c

8,00,000
8,30,000

By Machinery Sale a/c
By Balance b/d

1,40,000
14,90,000

16,30,000

To Balance b/d

14,90,000

From additional information - 1.

Assumption :

1.	The balancing figure represents value of machinery purchased during the current period for a consideration in cash or other current asset.

Dr	Reserve for Depreciation on Plant and Machinery a/c	Cr

Particulars

Amount

Particulars

Amount

To Machinery Sale a/c
To Balance c/d

12,000
48,000

By Balance b/d
By P/L Appr. a/c

40,000
20,000

60,000

By balance b/d

48,000

From additional information - 1.

Assumption :

1.	The balancing figure represents the depreciation charged to profits in the current period.

Dr	Machinery Sale a/c	Cr

Particulars

Amount

Particulars

Amount

To Plant and Machinery a/c

1,40,000

By Res. Depr. Pl/Mach a/c
By Bank a/c
By P/L Appr. a/c

12,000
1,20,000
8,000

1,40,000

From additional information - 1.

Assumption :

1.	The balancing figure represents loss on sale of machinery charged to profits during the current period.

Furniture

Dr	Furniture a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d
To Bank a/c

2,00,000
44,000

By P/L Appr. a/c (?)
By Balance b/d

44,000
2,00,000

2,44,000

To Balance b/d

2,00,000

From additional information - 4.

Assumption :

1.	The balancing figure represents depreciation on furniture charged to profits during the accounting period.

Buildings

Dr	Buildings a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d
To Equity Share Cap a/c
To Bank a/c

6,00,000
50,000
4,50,000

By Building Sale a/c
By Balance c/d

1,00,000
10,00,000

11,00,000

To Balance b/d

10,00,000

From additional information - 2., 7.

Assumption :

1.	The balancing figure represents value of building purchased during the current period for a consideration in cash or other current asset.

Dr	Reserve for Depreciation on Building a/c	Cr

Particulars

Amount

Particulars

Amount

To Building Sale a/c
To Balance c/d

10,000
6,000

By Balance b/d
By P/L Appr. a/c

12,000
4,000

16,000

By balance b/d

6,000

From additional information - 2.

Assumption :

1.	The balancing figure represents the depreciation charged to profits in the current period.

Dr	Building Sale a/c	Cr

Particulars

Amount

Particulars

Amount

To Building a/c
To P/L Appr. a/c

1,00,000
20,000

By Res. Depr. Bldg a/c
By Bank a/c

10,000
1,10,000

1,20,000

From additional information - 2.

Assumption :

1.	The balancing figure represents profit on sale of building included in profits during the current period.

Land

Dr	Land a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d
To Reserve a/c
To Bank a/c (?)

3,50,000
20,000
2,70,000

By Bank a/c
By Balance c/d

1,70,000
4,70,000

6,40,000

To Balance b/d

4,70,000

From additional information - 3.

Assumption :

1.	The balancing figure represents value of land purchased during the current period for a consideration in cash or other current asset.

Investments

Dr	Investments a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d
To P/L Appr. a/c

2,20,000
24,000

By Bank a/c

2,44,000

From additional information - 4.

Preliminary Expenses

Dr	Preliminary Expenses a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d

14,000

By P/L Appr. a/c
By Balance c/d

2,000
12,000

14,000

To Balance b/d

12,000

Assumption :

1.	The balancing figure represents value of preliminary expenses written off to profits during the current period.

Solution » Working Notes - Funds from Operation

We have to ascertain funds from operations to prepare the funds flow statement.

To ascertain funds from operations, prepare a ledger account by name ... Profit and Loss Appropriation account. Sometimes we may find this account in the balance sheet, in which chase, use that account here for finding the funds from operations.

After preparing the altered non-current accounts, look out for the postings by name "To P/L Appr. a/c" or "By P/L Appr. a/c" and complete the postings in the "Profit and Loss Appropriation account".

The balancing figure in that account would be the Fund From Operations. If the balancing figure appears on the credit side it represents a source and if it appears on the debit side it represents an application of fund.

Dr	Profit and Loss Appropriation a/c	Cr

Particulars

Amount

Particulars

Amount

To Reserve a/c
To Profit and Loss a/c
To Goodwill a/c
To Reserve for Depreciation
on Plant and Machinery
To Machine Sale a/c
To Depreciation on Furniture
To Reserve for Depreciation
on Building
To Preliminary Expenses

30,000
2,50,000
50,000

20,000
8,000
44,000

4,000
2,000

By Building Sale a/c
By Investments a/c
By Funds From Operations (?)

20,000
24,000
3,64,000

4,08,000

Since the Funds From Operations appears on the credit side, it represents a Source of Funds.

Statement Method

Statement for Calculation of Funds from Operations
Particulars	Amount	Amount
Current Period Profit Capitalised Add: Losses/Appropriations debited to Profit/Loss a/c 1) Reserve created 2) Goodwill written off 3) Reserve for Depreciation on Plant and Machinery 4) Loss on Sale of Machine 5) Depreciation on Furniture 6) Reserve for Depreciation on Building 7) Preliminary Expenses Written off	30,000 50,000 20,000 8,000 44,000 4,000 2,000	2,50,000 1,58,000
Less: Gains and Adjustments credited to Profit/Loss a/c 1) Profit on Sale of Building 1) Profit on Sale of Investments	20,000 24,000	4,08,000 44,000
Funds From Operations		3,64,000

Since the Funds From Operations is positive, it represents a Source of Funds.

You may use a method that is convenient to you. We recommend that you know both the methods.

Solution » Funds Flow Statement - Statement Form

To prepare the funds flow statement, we only need the information relating to the non-current ledger accounts and the funds from operations.

In the non-current ledger accounts prepared, all postings of Bank/Cash (or any other current natured accounts) on the

Credit side represents sources/inflows of funds
Debit side represents applications/outflows of funds

Collect that information and fill it in the statement to make up the funds flow statement.

Funds Flow Statement of M/s BROYHILL Industries Ltd, for the period from 31/12/05 to 31/12/06
Particulars	Amount	Amount
a) Sources (Inflow) of Funds 1) Share Capital (Stock) 2) Share Capital (Cash/Bank) 3) Debentures 4) Bank Loan 5) Plant Sale 6) Building Sale 7) Investments Sale 8) Land Sale 9) Funds from Operations	50,000 3,00,000 2,00,000 5,00,000 1,20,000 1,10,000 2,44,000 1,70,000 3,64,000	20,58,000
b) Applications (Outflow) of Funds 1) Purchase of Plant and Machinery 2) Purchase of Furniture 3) Purchase of Buildings 4) Fixed Deposits Cleared 5) Purchase of Land	8,30,000 44,000 4,50,000 2,00,000 2,70,000	17,94,000
Change in Working Capital [a - b]		+ 2,64,000

Since the Net change is positive, there is an increase in Working Capital (Fund)

Cross Check

The change in working capital as shown by the "Statement of Chanes in Working Capital" and the "Funds Flow Statement" should be the same.

Solution » Funds Flow Statement - T Form

Statement of Sources and Applications of Funds for the period from __ to __
Sources/Inflows of Funds	Amount	Applications/Outflows of Funds	Amount
Share Capital (Stock) Share Capital (Cash/Bank) Debentures Bank Loan Plant Sale Building Sale Investments Sale Land Sale Funds from Operations	50,000 3,00,000 2,00,000 5,00,000 1,20,000 1,10,000 2,44,000 1,70,000 3,88,000	Purchase of Plant and Machinery Purchase of Furniture Purchase of Buildings Fixed Deposits Cleared Purchase of Land	8,30,000 44,000 4,50,000 2,00,000 2,70,000
	20,58,000		17,94,000
		Change in Fund (Working Capital)	2,64,000

Since the Sources/inflows are more, there is a Net increase in Fund (Working Capital)

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